12 October 2010 - Post by:Helen Powell
There are plans afoot for a radical reshaping of the way the Pension Protection Fund levy is calculated – underfunding risk will be smoothed; investment risk will be taken into account; sponsor insolvency risk will be based on a 12-month average, not a snapshot, and the scaling factor will be fixed for three years at a time. The changes also mean that some schemes will no longer get a reduction in their levy bill for having a PPF-compliant (Type A) guarantee in place.
From 2012, there will be changes to the way sponsor risk is assessed in the levy calculation. Instead of basing insolvency probabilities on the current 1 to 100 failure scores, sponsors will fall into one of six bands. Schemes will only get credit for their Type A guarantee if the guarantor is in a higher band than their sponsor. In current failure score terms, if your sponsor is rated 92, a guarantee from a group company rated 97 would do you some good. A guarantee from a group company rated 96 wouldn’t. If your sponsor’s current rating is lower – say in the 70s – you need to find a guarantor with a rating of 90 or above to make any difference.
How do you know which band a company falls into? Well, you don’t – not for certain, anyway – until the measurement date (31 March 2012 for the 2012/13 year), when the average risk for the previous twelve months crystallises to give you the band for that levy year.
What does that mean? For schemes with sponsors and guarantors near the edge of a band, it probably means more ongoing monitoring through the year. It also means that if you’re going to the trouble of putting a Type A guarantee in place for the 2011/12 levy year, you want to be sure that the guarantor has a significantly better risk rating than the scheme sponsor – otherwise you might find that you get very little payback from the PPF for your effort, despite playing the game exactly according to its current rules.
For more details on the proposed changes, you can read our Pensions Prompt.
Helen Powell is a senior professional support lawyer at Allen & Overy LLP.